UGC NET Economics (001)

Welcome to UGC NET Economics (001). Follow Public Goods, Externalities and Pigouvian versus Coasean Remedies, then practise in the learning system. Sign in and use the study header to open your authorised course. Select this published lesson. Start Course Tutor with Auto audio on: it teaches continuously, answers a typed question, then resumes. Externalities arise when an action imposes costs or confers benefits on others that are not reflected in prices, so private and social cost or benefit diverge. A factory discharges effluent into a river used by a downstream fishery. Abatement costs the factory one hundred per unit; the damage to the fishery is one hundred and fifty per unit. Analyse under a Coasean and a Pigouvian approach. Establish the efficient outcome first, since both approaches should reach it. Abatement costs one hundred and avoids damage of one hundred and fifty, so abatement is efficient: society gains fifty per unit abated. Now take the Coasean approach with the right to a clean river assigned to the fishery. The factory must either abate at one hundred or compensate the fishery for damage of one hundred and fifty. It abates, since that is cheaper. The efficient outcome results. Now reverse the assignment, giving the factory the right to discharge. The fishery suffers one hundred and fifty per unit and can pay the factory to abate. It will offer anything up to one hundred and fifty, and the factory will accept anything above one hundred. A bargain is struck and abatement occurs. The efficient outcome results again, but the fishery pays instead of the factory, so the allocation of rights determined who bears the cost while efficiency was unaffected. This is the Coase theorem. Now add realism. Suppose there are four hundred separate fishing households rather than one fishery. Each must be identified, each must contribute, and each has an incentive to understate their damage and let others pay, since abatement benefits all of them whether or not they contribute. This is the free rider problem appearing inside the bargaining solution, and it is why Coasean bargaining is reliable for two parties and unreliable for many. A Pigouvian tax of one hundred and fifty per unit discharged avoids the problem entirely. The factory now faces a cost of one hundred and fifty for discharging against one hundred for abating, so it abates without anyone having to negotiate or reveal anything. Ask Course Tutor to explain this step: It abates, since that is cheaper. The efficient outcome results. Now reverse the assignment, giving the factory the right to discharge. Say what you tried. Pause and try this source task. What distributional insight does the Coase theorem carry? The source answer is: That the assignment of property rights determines who bears the cost of abatement without affecting which outcome is reached, so debates over rights are fundamentally distributional rather than efficiency questions, provided bargaining is genuinely costless. Compare your method and result, correct an error, then continue. Use Stop to end Course Tutor.